To Buy Or Rent Parking?

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Parking Space For Sale

October 12, 2011

 

Oh My! Parking is never easy at the best of times, but it looks like the driver of the car above unwittingly chose the spot which would become a Sinkhole! Yikes!

Today's post is a response to one of my clients who emailed me with the following question:

"A neighbour has offered to sell me his parking space in my condominium for $24,000. Do you recommend I purchase it instead of renting a second parking space for $125 per month? The monthly common fee for a parking space in my building is $50 per month."

For those who have ever faced this predicament, here's my reply to my client on why he should purchase a second parking space.

Instead of renting a second spot for $125 per month, consider putting $12,000 in cash down plus closing costs and blending the remaining $12,000 onto your condominium's existing mortgage. Today, a five year mortgage at 3.5 percent with a 20 year amortization is about $70 per month. Add the parking space condominium common fee of $50 per month and the space will cost you about $120 each month.

In other words, for $12,000 down + closing costs, you can pay the same to own a parking space versus pay the rent you currently do, plus never face a rental increase on the parking space as long as you occupy your residence.

Now, if you sell the parking space after five years the value of the parking space will be your original cost + the increase in market value. Five years ago, when you purchased your condominium, a space was $15,000. It's now $24,000. If the parking space continues to increase at $1600 per year as it has for the past five years, the market value five years from now calculates to be $33,000.

On that basis, your original $12,000+closing costs would give you a $7000 return on investment should you sell your property with two parking spaces (very rare and desirable) or you sell the second parking space to another resident (most condominiums restrict parking ownership only to other condominium complex owners) five years from now.

In addition, at the point of sale five years from now you would owe a balance of around $10,000 on the original $12,000 mortgage. That means, in addition to the $7000 increase in market value five years from now, you'd also have paid off $2000 of your mortgage-debt.

Based on this, there's a potential total gain of $9000 in five years at around the same cost of the $125 per month you're currently paying to rent the second space now. The requirement is that you put $12,000 + closing costs down.

The mitigating factor here is the parking space must increase in value at the same rate as it has for the past five years. However, even if it doesn't increase at all (unlikely), you will be building $2000 in equity by paying off part of the principal of your mortgage. You're also protecting yourself from parking rent increases. If the rent increases to $175 per month, over the next five years you'll have avoided an additional $3000 in rental payments! 

If you can buy a parking space for $24,000 in a downtown Toronto condominium, I consider it a reasonable investment with minimal risk.

~ Steven

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